Let's talk about what is happening in the capital markets, especially with index funds. But before that, we need to understand what a "fall from grace" really looks like. For this, we need to first talk about Pete Rose.
Pete Rose was not just a baseball star; he was the epitome of a "baseball star" in the eyes of all baseball fans. He was gritty, hardworking, tough, and relentless. Later, he became a player-manager, the face of a team, and a symbol of the sport.
However, in this process, he made some mistakes. It turned out that he committed one of the most serious sins of that era: betting on his own sport. Ironically, in today's context, where sports betting is ubiquitous on everyone's phones and relentlessly advertised in various sporting events, this seems quite paradoxical. But back then, people still cared about old-school concepts like "integrity." So, the league decided to take down Pete Rose to set an example.
Fifteen years later, the fallen Pete Rose, in need of money, had to lend his dwindling fame to WrestleMania. Soon, he found himself in the ring, facing off against a 400-pound Samoan wrestler, Rikishi.
Here, I must issue a word of caution: please watch with care. Because Rikishi has a signature move called the stinkface. This move is as "elegant" as its name suggests: Rikishi would trap his opponent in a corner of the ring, sit on them, then turn around, back up, and smash his enormous backside into the opponent's face, much to the delight of the audience.
You can look it up yourself. It's as awful as it sounds.
As Rikishi rubbed his huge backside on Pete Rose's face, if you look closely, you would see a rare expression in Pete's eyes. It was a mix of sadness and resignation. It was the look of someone realizing the depth to which they had fallen. His gaze was no longer filled with anger and defiance towards the circumstances of life but instead became distant, weary, and accepting of this new, sorrowful reality.
John Bogle is no longer with us. I can only imagine what expression he would have if he saw what is happening with index funds today. I can only imagine it would be a similarly sad look. A look of the same distant weariness and acceptance: his great invention, once standing so tall, now plunging into the sewer of deceit.
If you have been reading my articles for a long time, especially when I wrote more about stocks and ETFs in the past, you can probably guess what I'm going to say. But if you are a new reader, let me first give you some background. The real process of what happened is like this:
Low-cost investing used to be a powerful narrative that pitted the average investor against greedy Wall Street;
This narrative drove funds into passive index funds;
The fund inflows drove performance, causing the market-cap-weighted factor—essentially a combination of the anti-size and momentum factors—to outperform all other factors;
The outperformance led to more fund inflows, thus closing the loop;
Options trading volume surpassed stock spot trading volume, and derivatives linked to major indices began to drive prices more deeply than the index funds themselves;
Valuation no longer mattered for the market.
All of this brings us to today, and to this Rikishi moment we are facing. This moment is the SpaceX IPO.
First, Nasdaq modified the Nasdaq-100 Index rules to make it easier and faster for newly listed mega-cap companies like SpaceX to enter the index. These rule changes seem to have weakened the traditional index's standards in terms of free float, liquidity, investability, and replicability. Time will tell whether this is good or bad for investors. But one thing is certain: this has been very advantageous for Nasdaq in its bid for SpaceX to choose it as the primary listing venue.
Of course, you can say that configuring your stock based on the primary listing exchange is crazy. And you would be right to say so. I've been to those roadshows, and why a company chooses to list on NYSE or Nasdaq has nothing to do with the relative investment value of S&P or QQQ. We are talking about two completely disjointed worlds.
For example, people think that buying the Nasdaq-100 means buying tech stocks, but it includes Costco, Walmart, and a bunch of other things. They might also think they can get Oracle or Uber, but they can't because those companies choose to list on the NYSE, and the reasons have nothing to do with your portfolio. So you missed out on them.
It's just too crazy.
But that's how it has always been. And now it's worse. Because this time, it's not just about the listing venue. All index companies have revised their index methodologies just to cram companies like SpaceX, Anthropic, and OpenAI into the index. If valuation still matters, then at what valuation level index fund investors will buy into these companies will make you sick.
According to Hedgeye, the damage is as follows:
Regarding changes around the SpaceX IPO:
The index provider waived the profitability requirement and shortened the post-listing observation window from 90 days to 5 days.
This will force over $30 trillion of passive 401(k) and retirement funds to buy into SpaceX at IPO valuation.
Bloomberg Intelligence estimates that S&P 500 funds must absorb 19% of SpaceX's float within 6 months.
Russell 1000 and Nasdaq-100 funds will absorb 24%.
Those rules originally designed to protect passive investors:
Since 2002, the S&P 500 has always required companies to have 12 months of trading history and achieve GAAP profitability for 4 consecutive quarters. Now both of these requirements have been waived.
Nasdaq has shortened its inclusion window from 90 trading days to 15 trading days.
FTSE Russell has shortened it to 5 trading days.
All three benchmark indices are now designed to buy SpaceX at the IPO price level.
This is the moment. The index funds' "shark-jumping moment." This is the moment when the great Pete Rose stares at Rikishi's massive rear end, with a look of desperation.
Investors are no longer just outsourcing stock selection. They have also outsourced asset allocation, IPO discipline, liquidity judgment, valuation discipline, listing venue selection, and prudence principles. They have surrendered all agency in their trades to index committees, which will sway with the wind.
Indices are no longer neutral. They are making active bets, and they are betting on the most bubbly companies, at the peak of valuation.
Active management has never had a better entry point. Direct indexing has never been so critical. A significant shift is finally at hand.
Everything you used to hear about "smart but boring" index funds is no longer valid.
While you still can, get out. Choose your own methodology, choose your own factors, choose your own stocks, and reclaim control of your investment portfolio.
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